Fitting, considering we’re currently in the midst of this year’s World Series between the Texas Rangers and St. Louis Cardinals (Game 6 is tonight in St. Louis!)

Kay first asked Lewis why a book on baseball statistics, and Lewis explained that people are sometimes misvalued by markets, and that what Beane was doing with his team in Oakland in 2001 was a science experiment where “the lab rats [the players] didn’t really know they were lab rats.

Lewis went on to tell a hilarious story about first seeing the A’s players walking naked out of the showers, and how what he saw did not seem to be a gathering of muscle-ridden athletes. They were fat, misshaped, and otherwise seemingly disfigured.

When Lewis approached Beane to ask him about this, Beane explained “that’s kind of the point. We’re in the market for defective people. We’re in the market for players whose value the market does not grasp. We’re a magnet for these unattractive bodies!”

Lewis says that’s the moment it hit him: Beane’s assembled the misfit toys of baseball, the people who have been discriminated against because of their appearance and who are greatly undervalued when compared to their actual player statistics.

Lewis went on to explain, “I realized there was this discrimination going on in the market for baseball players. The way they had done it, with statistics, getting below it…the statistics though were besides the point. You had to think of it as a business. These baseball players, who do what they do, for the past 100 years, and there were all these people who considered themselves experts based on intuition instead of actual performance.”

So there they were, October 2001, the A’s v. The Yankees, and Billy Beane had some of the best players out there: Jason Giambi, Johnny Damon…but he knew he wasn’t going to be able to hold on to them, so he was going to have to throw the intuition playbook out the window.

Beane: “I remember thinking I will never have a collection of talent like this. What the heck are we gonna do? We knew they were gonna go (Giambi, Damon, etc.). We knew the whole year that was gonna happen, but we were trying to find some solution and replace in the aggregate what they did. So, we scoured guys who had A skill, not five skills. And because we had no money…we had one of the lowest payrolls…we couldn’t afford to invest in the romance of a player, but really what they could do and with no biases for or against them, just their performance.”

Oakland A's general manager Billy Beane explains to the Information On Demand audience how data now trumps intuition in that great American of pastimes, baseball.

“Quite frankly,” he went on to explain, “if we were ever going to trust the mathematics, this was the time. We had nothing to lose!”

Cay then posed the all important question: How did you come to this way of looking at the data?

Beane responded that “we never claimed to have invented anything. Numbers are historically scary to everybody, and math doesn’t come easy and doesn’t come from sports. Sports are more about the gut. But we had to be a disciplined card counter.”

Lewis elaborated: “The fact that they weren’t actually generating themselves a whole lot of new baseball knowledge, but that a lot of it was on the web, available to any team, and they recognized it as knowledge. And the use of analytics was so critical, as it took them to another decision point in the game of baseball.”

“This is why the market was so hostile,” Lewis went on. “That there was a new and valuable way of analyzing baseball players, because it implicitly undermined their intuition and knowledge of the game. All these years you did this job, spouting out an intuitive response. So it was finding a better way to measure baseball. Baseball stats are so clean, and it’s easy to assign them in the field of play. The second thing was, sports are somewhat anti-intellectual, and baseball was really anti-intellectual. Most of the kids who go on to play the game don’t go to college, and the game itself is not intellectually challenging.”

“You can’t be too stupid to play baseball,” Lewis explained, eliciting great laughter from the audience, and what had to be the most highly-Tweeted quote from the conversation.

The Information On Demand audience was packed into the Mandalay Bay Events Center to listen to Moneyball author Michael Lewis and Oakland A's general manager Billy Beane.

Then, to the heart of the matter in terms of bridging baseball analysis to business purpose: How did you get to the right numbers? asked Katty Cay.

Beane: “If you’re following metrics that have no correlation to business success, or in our case, winning games, you’re in trouble. The older the business, the more challenges and the more traditional and conventional thought.

“Baseball started in the mid 1800s. For us, it was simply put, out of necessity, if we had a dollar, where were we going to get the most efficiency from it. Bill James really started this whole thing, but he didn’t have a venue by which to test this out.

“But I was in the game, and I had the forum and the platform, and really no other choice. So, they had to be the stats that correlated the most to winning.”

Beane went on to detail his recipe: “We were able to pile all our chips to guys who got on base, and on base percentage had the strongest correlation to winning games. For us, this was the statistic that had the most impact on winning.”

Cay: In the moments, you have moments of tension with the staff re: intuition. Did you waver at all when you looked at the numbers?

Beane: “There was this perspective that it was risky, but it wasn’t, and the beauty of baseball over time is that there’s so many games you weed out the randomness and ultimately we thought we’d come out where we thought we could. We thought there was more risk in NOT doing it, in going with our guts.”

“To go with our gut would have been the most irrational thing to do.”

Cay: Michael, how do you think Billy was able to get away with this?

Lewis: “He had to be able to intimidate his staff. It was just him and an assistant who were privy to what the goals were. Re: the players, he said, we don’t tell them, it’ll just confuse them.”

“But he did get some resistance, yet it went away, because he was basically bigger than everyone else in the organization. He could beat up everybody there. There’s this law of the jungle quality to the clubhouse. The players also knew he was a better athlete than they were. It came clear to me right away where reason was being imposed by violence.”

Katty Cay interviews Moneyball author Michael Lewis and his featured subject, Oakland A's Billy Beane, in a fascinating and relevant interview at Information On Demand 2011.

More laughter.

Cay: He looked like such a nice guy.

Lewis: “He’s mellowed. He would chew tobacco, and his eyes would get red, and I would think, ‘Don’t get in his way!'”

Cay: Let’s translate that to the business environment. You have to have the confidence to go with what your’e analyzing with the data.

Lewis: “It’s sort of like, did it work or did it not worth? The confidence comes from having the information and feeling like you’re right.”

Billy: “As Michael said, the tough thing is how you give out the information, and you have to be careful. One of our directors in the back office, he said, ‘I don’t know what you guys are doing back there, but whatever it is, it works.'”

“If you were disciplined with it, you were going to be right to the end.”

Lewis: “There’s a huge amount of randomness, and you can have made a huge amount of decisions, but you can’t change the process of how you made that decision. People make decisions based on outcomes in sports all the time.”

“If you’re the casino, and you stack the odds in your favor, and you play a really disciplined game, it’s going to be an optimum strategy.”

Cay: You described it as a flipping a coin….if you flip it a million times, it will come out well.

Beane: “The great thing is that the eight teams that get there, those are usually the best teams. But then you get into a round robin series, and the best team doesn’t always win. The Phillies were one of the best teams this year, but micro events did them in.”

“So a lot of decisions are made on those random events that happen in a short series.”

Lewis: “For me, this was not just a sports story, it was a market story. It wasn’t the actual number crunching that interested me, but rather what it exposed about the world around me.”

“You could quantify a player’s value very precisely, but you could value what he’d done in the past. How can a market be so misvalued for such an obvious thing as a baseball player. What’s going on in markets is people are operating using intuition vs. statistics, and that influences their judgement!”

“People generalize from small sample sizes. People overvalue things that are flashy and easy to see, like foot speed or arm strength. And they underestimate things like plate discipline or ability to get on base. The big thing is understanding those biases and you, the business manager, are making at least partially intuitive judgments.”

Cay: Why did you let him write a book about this?

Beane: “This is a long answer. There was a momentum that was already starting to happen, and other teams were out there. Brian Cashman in NY, others, were already on their way. So the book maybe accelerated it a bit. But the information was on the Web so fans could do the same work. And technology, there was just no way to ignore the fact that technology was creating data that they could go out and analyze themselves.”

Cay: Arbitrage only lasts for a small period?

Beane: “Yeah, other people catch on, even with Wall Street. The other thing was, when my assistant came in, who was a Harvard graduate, there was now an avenue for people to come into the game who were highly intelligent. Smart people had an opportunity, and it became a meritocracy in the front office.”

“Today, the people who are running sports teams…well, I like to say, in 10 years, I won’t be employable.”

“And what really captured us about Michael, he said right away, ‘you guys are arbitraging the misevaluation of baseball players.'”

“We sort of viewed him as a resource to us as well. And he was validating everything we did. He became one of the guys.”

Lewis: “I just had a single question: How is this happening? And it was more than five minutes than I caught on, but it was the Wall Street story in the easy 1980s when a previously, not intellectual business, got complicated and people saw arbitrage opportunities in the market.”

“And in the course of the reporting, it became clear that other teams, especially the Boston Red Sox, had started learning what was going on. The Boston folks tried to talk me out writing the book, and they wanted me to try and talk Billy into coming to work for them!”

“You could already see that the market was going to move, and the opportunities I identified in the book were going to go away. So it would have been socially awkward to have thrown me out by this time.”

“So the book was all about them, and all about him [Billy], and he gets a galley, and he’s at spring training in 2003. And he calls me, and he’s upset after reading it. What’s disturbing you?”

“You had me saying ‘F—k’ all the time. And I said, ‘But you do.’ And he says, ‘My mother is going to be furious!'”

“As a coda to the story, when I’m on the book tour, and I’m doing a reading in San Diego, and there’s a lady at the back, with her arms folded like this, and I thought, ‘Oh no…that’s Billy’s mother.'”

“She comes up afterwards and says, ‘My son doesn’t talk like that.’ And I covered for him.” Lewis explained he went on to have the most awkward dinner with Beane’s mother for the next two hours.

Cay: So weren’t you concerned he wrote this blueprint for arbitrage?

Beane: “No. Because I said to Michael, “You don’t think anybody in baseball is going to read your book, do you?”

Huge laughter from the audience.

Cay: But they did. And the game changed…baseball changed…so how are they using analytics today in a way they weren’t 10 years ago?

Beane: “None of them are stupid enough to let Michael in so we don’t know!”

But seriously, Beane explained, “The Yankees now have 21 statisticians!”

Lewis: “Think about why that’s changed. 20 years ago, signed a player who didn’t perform, that was a $20K mistake. Now, that’s a $20M mistake. So all the front offices have evolved and they’ve ballooned their analysis staff.”

“After the book came out, what’s amazing was how it changed. Baseball owners were getting calls from Wall Streeters, telling them they were wasting money. But the industry left to its own devices would have not changed.”

“The lesson? If you got a business with an entrenched culture, you don’t know how entrenched it is. There are so many disincentives to not changing what they know to what they don’t know. There’s a personal resistance to that.”

Cay: So are we seeing a generational shift in the game?

Lewis: “Sure, all these 50 year olds have been lopped off, and all these 20 and 30 somethings are now running the game. There’s a book entitled The Structure of Scientific Revolutions, which explains how middle aged physicists are hesitant to embrace ideas from the younger generation coming after them.”